This article reports results for the Russell 1000 Index as of November 2. This index was analyzed using a once per year trading system triggered by yield, called the "Dogs of the Index" to determine the best of the best dividend stocks.
Deconstructing the Russell 1000 Index by yield provided a useful guide to the top 10 currently undervalued stocks therein. The article further flagged five of those deemed by a quorum of analysts as showing significant upside price potential in addition to substantial dividend yield.
A once per year trading system triggered by yield, called the "Dogs of the Index," gives investors the tactical advantage of obtaining all the wisdom and knowledge of well-paid wizards of investment and publishing for free, merely by choosing an existing collection of equities built by those experts.
This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book, "Beating The Dow" (HarperCollins, 1991), revealed how low yielding stocks whose prices increase (and whose dividend yields therefore decrease) could be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index. Prior to the publication of O'Higgins' book, Dow dogs were known by some market watchers as "fallen angels."
Dogs Of The Index Metrics
Two key numbers determined the yields to rank the stocks in each index: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock declared the percentage yield by which each dog stock was ranked.
Historically, dividend dog investors utilized this ranking system to select portfolios of five or 10 stocks in any one index, sector, or survey to trade. They awaited the results from their investments in the lowest priced, highest yielding stocks and prayed that the price of every stock they now owned climbed higher (having locked in a high yield percentage at purchase).
Investment Wisdom From The Russell 1000
Listed below are the top 30 Russell 1000 stocks by yield as of 7/2/12 per Yahoo Finance data. Russell Investments states that the Russell 1000 Index offers investors access to the extensive large-cap segment of the U.S. equity universe, representing approximately 90% of the U.S. market.
The Russell 1000 index is updated annually and the latest revision is reported here.
Six of the top 10 stocks in this index paying big dividends as of November 28 were financial sector firms: American Capital Agency (AGNC) led the top three. Two more financials immediately followed: Chimera Investment Corp. (CIM); Annaly Capital Mgmt Inc (NLY). Hatteras Financial Corp (HTS) was fifth, while MFA Financial Inc, (MFA) placed eighth; finally, Ares Capital Corp (ARCC) found the ninth slot. One consumer goods firm, Pitney Bowes Inc (PBI) placed fourth. Two technology firms made the top 10: Windstream Corp (WIN) in sixth; Frontier Communications (FTR) in 10th. One services firm, Donnelley R.R. & Sons Co. (RRD) placed seventh.
Of the top 30 Russell 1000 dividend payers, 14 represented non-financial companies. Two services, three consumer goods, four technology, two basic materials, and three utilities represented the five non-financial sectors on the top 30 November Russell list.
Dividend Vs. Price Results for Russell 1000 Dogs
Below is a graph of the relative strengths of the top 10 Russell 1000 index stocks by yield as of November 28, 2012. Projected annual dividend history from $1000 invested in the 10 highest yielding stocks each month and the total single share price of those 10 stocks created the data points for each of eight time periods shown in green for price and blue for dividend.
Actionable Conclusion: The Russell Index Followed A Bear Track In 2012
Since February, Russell 1000 components projected annual dividend from $1000 invested in the top 10 stocks by yield rose 6% as their aggregate single share price dropped 12%. This index has been especially bearish since October, as dividends from $1000 invested in each of the top 10 stocks inclined 6% while single share prices for those stocks declined 5%. The gap between dividend from $1000 invested in the top 10 stocks by yield and their aggregate single share price widened from 640% in February to 791% in November.
Actionable Conclusion Two: Analysts Forecast Annual Gains Up To Near 23%
Top 10 dogs for the Russell 1000 components list were graphed below to show relative strengths by dividend and price as of November 28, 2012, and those projected to November 28, 2013.
Historic prices and actual dividends paid from $1000 invested in the 10 highest yielding stocks and the aggregate single share prices of those 10 stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1000 invested in the 10 highest yielding stocks and aggregate one-year analyst mean target prices as reported by Yahoo Finance created the 2013 data points -- green for price and blue for dividends.
For the coming year, Yahoo Finance projected a 10.25% lower dividend from $1000 invested in each stock within this group, while aggregate single share price for the 10 was projected by analysts to increase by 12.7%. Five probable profit generating trades one year from now revealed by Yahoo were:
American Capital Agency netting $243.71 based on mean target price set by 20 analysts;
Pitney Bowes Inc. netting $472.85 based on mean target price set by four analysts;
Hatteras Financial Corp netting $219.65 based on mean target price set by 14 analysts;
Windstream Corp netting $297.18 based on mean target price set by 13 analysts;
Donnelley R R & Sons Co. netting $485.80 as of next November based on mean target price set by four analysts.
The resulting net gain from dividends and swept price gains from the top 10 was 22.77% from $10,000 invested, according to analyst estimates.
Will Russell 1000 bear tracks continue into the new year? Stay tuned also for periodic updates on how well or whether projected gains for 2013 hold.
Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.